By: Julius Jönson
The rise of China has been one of the most prominent features of global politics in the 21st century. Initially viewed with admiration and later with increasing alarm in the West, the predictions of the end of Chinese success have been bountiful. In 2015 some analysts speculated that the stock market crash was a sign of an economic slowdown in China. Similarly, there have been numerous predictions about how a bursting property bubble might puncture the Chinese economy, and so on. As of 2024 however, China is still here, more active in asserting its power than ever.
But behind the headlines of stocks and property markets, another crisis, rooted in the very factors that made the Chinese model so successful in the first place, is quietly gathering strength. At the end of the Chinese road to success, one does not find a property bubble, but the aging parents of a single child. To understand China’s success and looming crisis, we must return to two decisions taken in the late 1970s.
Economic reform and fewer children – a dynamic duo
The Chinese economic miracle is generally regarded as starting with Deng Xiaoping’s liberalizing reforms in 1978, which opened the previously closed economy and provided a vast supply of cheap labor, turning China into the “world’s factory.” Around the same time another decision was taken that would play an important but less visible role in the Chinese economic miracle: the one-child policy. The policy accelerated the already dramatic decrease in birth rates: between 1970 and 1990, the number of children per woman in China fell from 6,1 to 2,5. This meant that just as China’s economic growth started to take off, the elders and children were few while people of working age constituted a disproportionate amount of the population. The costs associated with non-workers in the population were consequently minimal, whereas the workforce consisted of hundreds of millions, adding power to the Chinese economy.. Demographers call these favorable age structures a demographic dividend.
These two factors – economic reform and favorable demographics – interacted and amplified each other, leading to unprecedented economic growth. However, having a disproportionate amount of workers eventually means having a disproportionate amount of elders when the large generation starts to retire. The inevitable hangover from 5 decades of demography-induced growth is now rapidly approaching in China.
Seismic shifts in the Chinese age structure
But how big of a shift are we talking about? Aging can often seem abstract so let’s look at some numbers. There are currently about 20 elderly people per every 100 workers in China. Due to the large generation born in the 1970s now reaching retirement age, this number could double (!) to 40 elders per 100 workers in the 2040s. Because China saw an extraordinarily rapid drop in fertility rates, the aging of the population will be equally fast half a decade later.
In absolute terms, the Chinese workforce will decline by 130 million between 2024 and 2040, while the population above 65 years old will increase from 208 to 357 million. As the retirement age in China is far below 65, the actual numbers are likely even higher. By 2040, elderly Chinese people will outstrip the entire population of the United States. The breakneck speed of the aging process will put the economy and society under tremendous strain. It is also important to note that birth rates have fallen much faster than previously expected, adding further explosive power to the Chinese aging bomb that is now slowly detonating. So what will the consequences be and are there any solutions?
China is growing old before it is getting rich
While China’s economic growth has been fast, the country has aged even faster. Simultaneously, the birth rate declined further to around 1 child per woman in the 2020s, far below the replacement rate of 2,1 needed to keep the population from declining. The country is several times richer than it was 50 years ago, yet still not nearly as wealthy as other aging societies in East Asia, Europe, and North America.
This is significant for two reasons. Firstly, fewer workers and more retirees are a lag on economic growth. If the workforce stops growing it is almost certain to have an adverse effect on the economy. An aging population means fewer workers have to pay for soaring pension costs as the number of elders increases. These facts are going to make China’s goal of becoming a high-income economic superpower more difficult.
Secondly, many old countries are also rich and innovative, meaning that they can use new technology to some of the effects of an aging population. If employers are having trouble recruiting staff due to labor shortages, automation can be a way to make more with less. South Korea and Japan, who also struggle with aging populations, have both become leaders in robotics. However, investing in automation is expensive, and South Korea and Japan are currently about twice as wealthy as China. If the trend continues, China might start experiencing population troubles before it has grown wealthy enough to “throw money at the problem”.
Too late to reverse the trend
What about solutions? Surely there is something to be done about aging populations? The knee-jerk reaction of most governments facing population troubles is to encourage people to have more children. For example, Beijing has now ditched its one-child policy in favor of measures to promote childbirth. This response makes sense intuitively but, in fact, does little to abate the situation.
Firstly, as ample evidence shows, it is extremely difficult to meaningfully increase birth rates once they have started falling (and God knows governments have tried!). This is because falling birth rates are caused by a cocktail of structural factors that cannot easily be reversed by government policy. Even countries that provide generous grants to families, paid parental leave, subsidized daycare, and promote gender equality within the family have not managed to reverse the trend. This is true in virtually every country, regardless of culture, religion, or societal structure.
Secondly, once the consequences of an aging population are felt, it is too late to act. Even if the birth rate in China surged back above the replacement level of 2,1 births per woman (which it won’t), the children born in 2024 will not start working until the mid-2040s. In the meantime, China’s workforce will still have shrunk by 180 million people, while the number of retirees will have doubled. These people are already born and will retire regardless of the number of births next year. There is now little Beijing can do to prevent rapid aging, and the government’s focus will soon have to shift from trying to reverse the trend to mitigating its effects. There are a couple of tools the government could use to do so.
Possible solutions?
When the effects of an aging population are beginning to be felt, the first measure is usually to squeeze more out of the workforce by raising the retirement age and making people work longer. Beijing has already started this procedure, announcing in September 2024 that the retirement age is being raised and the mandatory contribution to the pension system is being increased.
Another option touched upon earlier is to embark on a robot spree and automate as many tasks as possible to compensate for the lack of physical labor. Beijing is currently very much pursuing this option – the country is now the largest market for robots, having surpassed the USA in robots per capita in 2022. It is also no secret that Beijing is planning to turn China into a high-tech economy, and this involves a good deal of investment in new technology and automation.
The problem with this solution is that not all jobs can be easily automated. While it has proved possible to replace human labor with robots in factories, it is much more difficult in the healthcare and service sectors. Unluckily enough, these are the sectors where demand for labor is set to grow the most, as elderly people require more healthcare and eventually move into nursing homes. With a modest pace of aging, it is possible that some combination of more work and automation would be enough, but as the pace of aging in China is anything but modest, these two solutions will likely not be enough.
The solution nobody wants
There is one more way to compensate for a shrinking labor force – importing foreign labor! This is usually a solution governments avoid if they can as migration is a controversial topic in many parts of the world. This is certainly the case in China, where migration from foreign countries is practically non-existent. As of 2021, migrants account for only 0,07% of the Chinese population. However, demographic necessity might be the mother of invention. We now see countries such as Japan, South Korea, Poland, and Hungary – all traditionally skeptical of migration – welcoming more and more foreign workers because of domestic shortages.
This will be a hard pill for a country with virtually no recent history of migration to swallow, but due to the aging bomb about to detonate in China, Beijing may have to re-evaluate its position on this controversial issue.
The end of the Chinese success story?
Did two decisions in the 1970s simply start the clock on 50 good years in China that are now approaching their end? The decisions made decades ago, while instrumental in fostering rapid growth, have now set the stage for an unprecedented aging of the population that threatens to strain both the economy and social fabric. The current trajectory indicates that without significant policy shifts and innovative solutions, China may struggle to maintain its status as a global economic powerhouse. Because of the unprecedented speed of the aging process, it is not unreasonable to presume that China will have to use all the tools in the toolkit, including the promotion of migrant labor, in the relatively near future. This will likely be combined with an aggressive campaign to increase birth, but as we know from ample examples, such campaigns usually only yield modest results.
Ultimately, China’s approach to its demographic transition will not only shape its future but also provide valuable insights for other nations facing similar challenges. In other words, the country will unwillingly become somewhat of a case study. We know that China has surprised the world before by overcoming obstacles analysts thought would mean the end of the country’s success. We also know that the doubling of the number of elders per worker in 15 years is one of the fastest rates of aging ever recorded in world history. Only the future can tell us which of these trends will dominate. The challenge of its aging population might not be the end of the Chinese economic miracle, but it will certainly be the end of China as we know it.
Photo: Ling Tang / Unsplash
